Dollar Strengthens as U.S. Inflation Rises and Middle East Uncertainty Supports Safe-Haven Demand

Investors and forex traders are focused on macroeconomic data. In the first quarter, gross domestic product came in at 1.6% instead of the expected 2.0%, which Commerce Department officials attributed to weaker consumer spending and lower investment volumes. The Personal Consumption Expenditures price index, one of the key indicators for the U.S. Federal Reserve, reached a three-year high in April at 3.8% in headline terms and 3.3% in core terms. Initial jobless claims rose from 210.0K to 215.0K, exceeding forecasts of 211.0K. The four-week average increased from 202.75K to 209.00K, below the expected 211.00K, while continuing claims rose from 1.771 million to 1.786 million.

Thus, the U.S. economy and labor market remain resilient despite a significant increase in inflationary pressure, which could push officials toward raising interest rates early next year. In addition, the Middle East situation remains highly uncertain: today, several media outlets reported that the United States and Iran had agreed to extend the ceasefire for 60 days, during which the sides are expected to begin discussions on Iran’s nuclear program. It should be noted that U.S. President Donald Trump has not yet approved these agreements. The White House chief also hinted that he is not seeking a lasting peace in the region before the midterm congressional elections because he is indifferent to their outcome. This indirectly signals that the conflict, even if frozen, could drag on for a long time.

Eurozone

The euro is strengthening against the pound, weakening against the U.S. dollar, and showing mixed dynamics against the yen.

Today, May data from Germany, the largest economy in the EU, was published: the consumer price index fell from 0.6% to –0.2% month-on-month instead of the expected 0.1%, and from 2.9% to 2.6% year-on-year. The harmonized indicator declined from 0.5% to –0.1%, compared with forecasts of 0.2%, and from 2.9% to 2.7%, respectively. Overall, inflation in Germany remains above the European Central Bank’s 2.0% target, although further growth is currently being restrained by increased government subsidies and investment. Meanwhile, Bank of Italy Governor Fabio Panetta said that the regulator will act in a timely and balanced manner to prevent the energy crisis from becoming persistent, adding that oil and gas prices are unlikely to normalize quickly even if the U.S.–Iran conflict is resolved soon.

United Kingdom

The pound is weakening against the euro, the yen, and the U.S. dollar.

Investors are focused on today’s comments from Bank of England Governor Andrew Bailey, who said that the current inflation overshoot above the 2.0% target is normal and that there is no need to rush to contain it. He added that the regulator must closely monitor the situation in the Middle East and its impact on the UK economy and price pressure, adjusting monetary policy only when necessary.

Japan

The yen is strengthening against the pound, weakening against the U.S. dollar, and showing mixed dynamics against the euro.

Investors are assessing May inflation statistics for the Tokyo metropolitan region: the consumer price index declined from 1.5% to 1.4% year-on-year, while the core indicator fell from 1.5% to 1.3%. Overall, price pressure in one of the country’s most developed economic regions remains below the Bank of Japan’s target. However, experts believe that the effects of the current energy crisis may soon accelerate price growth, prompting the regulator to move toward tighter monetary policy. Today, April industrial production data was also released, showing an increase from –0.4% to 0.8%, while retail sales rose from 1.4% to 2.1%.

Australia

The Australian dollar is strengthening against the pound, the yen, the U.S. dollar, and the euro.

On Monday, May manufacturing business activity data will be published. The index is expected to remain near the stagnation zone at 50.2 points, confirming significant pressure from the energy crisis on industrial companies and further pressure on overall economic growth. This could reduce the likelihood of monetary policy tightening by the Reserve Bank of Australia, although most experts currently expect at least one more interest rate increase by the end of the year.

Oil

Oil prices are correcting downward today under pressure from reports that the United States and Iran managed to agree on a deal to extend the ceasefire for 60 days, during which the sides will negotiate Iran’s nuclear program. Although the deal has not yet been approved by U.S. President Donald Trump, many investors hope for a quick settlement of the U.S.–Iran conflict.

In addition, the weekly fuel inventory report published the day before by the U.S. Energy Information Administration showed a decline in crude oil inventories by 3.327 million barrels, gasoline inventories by 2.572 million barrels, and distillate inventories by 2.107 million barrels.